Key points to remember
- Bitcoin’s hash rate is the amount of computing power contributed to mining.
- It continued to soar to new all-time highs.
- This is squeezing the profitability of miners, at a time when electricity costs have risen and the price of Bitcoin has fallen.
- Overall, a high hash rate implies a healthy and more secure Bitcoin network.
“All-time high” is a phrase I haven’t used in a while to cover the cryptocurrency space. But if you look, there’s something that continues to hit higher highs, and that’s Bitcoin’s hash rate.
Bitcoin’s hash rate refers to the amount of computing power that is brought to the network through mining. And as the graph below shows, its inexorable rise during the pandemic doesn’t seem to be slowing down. But what does this mean and why is it increasing?
What is the Bitcoin hash rate?
Gone are the days when anyone could start a mining activity on their personal computer. Today, mining is dominated by large mining pools, using specialized computers specially designed for this purpose.
The practice of mining actually involves these computers solving complex mathematical puzzles. Once this puzzle is solved, the last block of transactions can be validated and attached to the blockchain, before the process repeats itself regarding the next block and the next mathematical puzzle. Once a puzzle is solved and a block is validated, the miner responsible for this work is paid in newly created Bitcoins.
This is all very complicated, but what is important to understand is that Bitcoin is programmed to release a specific number of Bitcoin over time, with the blockchain coded in such a way that a new block is added ( validated) every ten minutes.
But as more computers join the network and the hash rate increases, these puzzles should be solved faster, which means faster block time and more Bitcoins released. That’s right ? Well, here’s the thing. One difficulty adjustment is encoded in Bitcoin – this means that the more computing power that joins the network, the harder it is to solve these puzzles.
Don’t ask me how it works, because I’m not even close to understanding what lies under the hood of the mythical beast that is the Bitcoin blockchain, but the main point is that the more miners join the network, the more the difficulty increases.
And as Bitcoin has become more popular (and its price has risen), that is exactly what has happened. More miners have joined the network, and today it is a very advanced process. Ten years ago, when there were few miners, you and I could have pulled out our laptops and mined to a reasonable degree.
Why is it at historic highs?
There are a number of reasons why the hash rate continues to reach new highs. But the bottom line is that increasing the number of miners drives up the hash rate.
So, the question is really asking why miners keep joining, while the price of Bitcoin has fallen. There are a few potential answers here.
The first is that during the pandemic bull run, mining equipment was scarce and prices for items such as chips were exorbitant. Many miners ordered new mining rigs during the bull run, but only recently received the equipment (or some, not even yet).
Additionally, as the price of Bitcoin has fallen, the profitability of mining has also declined, since miners’ earnings are denominated in Bitcoins. New mining equipment has been developed and is selling at a lower price than before, helping to increase the number of miners.
Another theory is the Ethereum merger. This took place in September, when Ethereum moved from Proof-of-Work to Proof-of-Stake, meaning mining on the network ceased. Therefore, some of these unemployed Ethereum miners switched to Bitcoin mining.
What does a higher hash rate mean?
The first consequence of an increasing hash rate is obviously greater pressure on miners. Increased competition and higher hash rate reduce their profitability, especially at a time when electricity costs have risen and revenues (Bitcoin) have fallen.
The best way to see this is to take a look at the stock price performance throughout 2022 of some of the public mining companies.
On the positive side, Bitcoin’s hash rate is considered a security measure for the network. The higher the hash rate, the more secure the network, so in this context, the all-time high is a good thing.
This is why a high hash rate is generally viewed favorably, as it implies a healthy network. The only problem is that the miners feel the pressure.
